Rational Observations

In Wednesday’s cover story, we provided perspective on the US’s disappointing Q4 advance GDP report. Namely, government retrenchment and seemingly transitory negative effects masked otherwise robust and ongoing private sector growth. No surprise to us: For much of the past few years, private sector strength—the engine of the overall economy—has gone relatively unheralded while pulling the weaker parts along. And other signs of private sector strength continue to emerge every day.

For example, although overshadowed by Wednesday’s GDP report, Monday’s December durable goods orders, showed headline growth of 4.6% m/m—easily topping estimates of 2.0% m/m growth. Much of the growth was buoyed by defense and aircraft orders (highly volatile), but even stripping away the more variable components, growth still clocked in at 1.3% m/m. So much for businesses slashing spending due to federal fiscal fears as the fiscal fungible cliff approached.

Thursday’s personal income report showed incomes jumped 2.6% m/m in December, well ahead of the 0.8% consensus forecast. The BEA and others pointed out the large gain was mostly driven by special dividends and bonuses in anticipation of pending tax hikes—which we find no argument with. But chalking it all up to only those factors ignores the fact personal income has risen for 13 straight months now.

Personal spending rose too, a modest 0.2% m/m. But when you consider consumer spending accounts for two-thirds of overall economic output, even 0.2% growth is nothing to sneeze at. Growth is growth, after all.

There’s some chatter that folks are becoming less fearful and more confident (which some presume is a negative sign.) After all, bull markets tend to climb a wall of worry until they reach the irrational, euphoric and seemingly worry-free summit—then fall. But, while sentiment has certainly thawed, there’s still plenty of skepticism to be found—the current environment certainly doesn’t seem euphoric to us. Instead, it seems a bit more like some folks are now starting to rationally perceive the growth that’s long existed and markets have long reflected.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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